What method is used to determined the price of a project ?

The hardest part of the pricing for me has always been figuring out my overhead. If you look at some of the projects that people sell and the prices they sell them for it is crazy. You get a cutting board with $25.00 in materials and it is selling for $35.00. Now if this is the type of sales someone is looking for then so be it. To me they are losing money. There are too many factors not accounted for. The first thing to consider is are you looking to sell stuff and make pennies per hour or are you wanting to charge a fair price which in turn gives you a fair profit for your time and talent. If you are looking to make a fair profit than you must first understand your true costs, what is your overhead truly costing you? Here is an example of what you might consider in your overhead calculation:

• Misc supplies such as sandpaper and other supplies.
• Rent, you may not have any now but at some point you might have to pay it.
• Electricity
• Phone

Example:
Misc $75.00 per month
Rent $1,000.00 per month
Electricity $100.00 per month
Phone $25.00 per month

Total $1,200 per month

Now figure how many hours you have available in the shop. As an example you can work 100 hours a month in the shop.

Next is to take the total cost per month and divide it by the workable hours.

Example:
$1,200.00 / 100hours = $12.00 cost per hour.

Next you need to take the overhead and come up with a few other things.

• How much do you want to earn per hour for your work. To calculate this, what would you expect to get paid if you went to work for someone else doing the same thing? Make sure to pay yourself a fair wage. As an example $21.00 per hour
• Benefits - I realize that you may not be giving yourself any benefits at this point but as you start to earn money and you want to make this legit you will need to pay taxes and SS and so forth. As an example 1/3 of labor $7.00 per hour.

Overall Example
Labor $21.00 per hour
Benefits $7.00 per hour
Overhead $12.00 per hour

Sub Total $40.00 per hour
Profit % 20%

The profit % is how much profit you want to earn on the job. I used 20% as an example above. So if we have $40.00 per hour as an overhead example you would add 20% to that. See below:

Overall Example
Labor $21.00 per hour
Benefits $7.00 per hour
Overhead $12.00 per hour

Sub Total $40.00 per hour
Profit % $5.00 per hour.

Total $45.00 per hour

Once you figure out your overhead rate it is easy to figure out how much to charge for a job. If a job will take 4 hours to produce below is an example of the amount to charge.

Materials $30.00
Labor $180.00

Total $210.00

You may not get all the jobs you bid on but at least you know when you take jobs you will be making a fair wage for your time. The only other thing you might want to add to this is a markup on the materials, as an example 10 or 20%.

You can remove or add things to this to suit your needs; it has to work for you.

I am sure some will agree with this and others will not, this is not a definitive calculation but a starting point.

Innovator - I agree with everything you said, but want to add to the overhead part of the calculation.

All of the tools you have, were purchased with money you should be recovering and you should be charging now to replace those tools when they wear out or the next generation is needed.

Many ways to do this and full time businesses have accountants that take care of most of this for them.

My approach (no accountant) is to take the purchase prices and run them out for the expected life of the tools. I'm not going to get into debating the life of any tool here, but be realistic. For those that are known to wear out, predict the time until then and look at that as a bill that is going to come due. The IRS assumes most any tool in a normal workshop is five years.

For example a table saw price could be divided by 60 months and then by 30 for a daily cost. If you don't have work to charge for the table saw, then it is assumed that the life is going to actually be longer.

At the moment, I am not able to charge the full amount of the ammortization and points that Innovator has made, but unless things change I know my future is in jeopardy. Tools will need replacement and the money won't be there.

On one hand, I have seen where I have submitted a detailed quote showing an overhead, material, labor and facilities that the cost is more readily accepted. Other hand is that the realistic quote has the person decide they don't need the job done.

If you have Microsoft Office, go to Microsoft.com and they have download templates for Excel that start out pretty complete and you can modify. The more proffesional it looks the better image you project.

My opinion.

Steve.

All the suggestions above are very good….and will get you close to where you want. You must also be aware of the market….even if you have calculated your costs down to the nth degree…if the market price will not support where you want to be…you will not sell the product…period.

Always watch your market….I would recommend doing research evaluating the pricing of objects of the same quality and purpose if possible (ebay is a great source….and you can really come up with the market value of items that sell there). Once you get a good idea of market price….you can work up your actual cost and see if you have a viable product..

As for machines….you can calculate the life as stated above - its called depreciation or ammortization and apply that…or you can calculate the life in hours and apply the costs based on the actual use…. The costs of your materials and time are termed the direct costs….any money left after you take the direct costs out of what you sell it for is called the contribution margin. The net of the contribution margin and your indirect or overhead costs is either break even, a loss…or profit.

There are tons of good programs out there for estimating….or you can use a spreadsheet. You can cull the costs out of your checkbook…listing the cost of materials (wood, finish, brushes, sandpaper, screws….etc). Then you can add your hourly wage (whatever you think is a fair burden)...then tally it up and divide by how many items you made.

For Overhead - put all your checks in a spreadsheet for a month (you can use quicken or any of the freeware checkbook programs)...make colums for different expenses - like food, utilities…etc. Spread the check amounts out into the columns and tally them up. From there you get a fair idea of what your overhead runs for a month (you can then calculate this cost to hourly, daily…etc for applying or burdening to the job).

Thats a very simplistic approach…which will work for the majority of small business

ReggieK touched on a very important aspect, what the market will bear.

For that, you can use the above information in reverse. If you know a widget can only be sold for $XX.xx in your market, then you need to figure a way of meeting the price with a profit. Obviously, someone else has found a way to set this cost. This can drive you to examine your raw material cost, ,methods or having something outsourced. Maybe also tell you to move into a different product or niche.

I had products that required a thickness (3/8") I could only get by resawing raw stock. Not having a band saw, I was doing it in two passes on a table saw. That required planing and time. Talked with the mill that I got my lumber and found they would resaw for only $15 on $175 of wood (8 boards) I bought from them. Their resaw only required a single pass on my planer. The time saved allowed me to double the amount I could make in a day, before staining which I could then do on a larger batch.

Another time I changed wood type from hard maple to cherry due to the mill having "shorts" on special that saved me about 40% per board foot. I was making items for sale and not to a customer order, so I could do that. Another time, I offered the parts from basswood, although people thought the low weight odd for being wood and they didn't sell as well.

Bottom line is that you need to understand all of your costs of doing business and then keep an open mind on lowering them.

The problem Innovator is that our idea of a fair wage is different from the rest of the world. How much value a customer puts on a project depends on their reference point. Eugene wants to sell "widgets" at a flea market. If it takes him four hours to make a widget, using your example, he would need to sell his widget for $210. The problem is, the customer has seen similar China-made widgets at Wal-Mart for $19.95. They have a reference point and are not willing to pay what they consider, and rightly so, a ridiculous price.

Craft shows are really tough this year. I would imagine flea markets would be even worse for our products. Normally, customers at flea markets are looking for deals and customers at craft shows are looking for uniqueness and quality (and a funnel cake). From my experience, the only people making money at craft shows this year are the food vendors. You have to have something that is very different than what customers see in the variety stores.

As far as cost Eugene, I am assuming that you are building your projects in your garage. If this is the case, then I wouldn't get too wrapped around overhead and the other stuff at this point. You are already paying for insurance, electricity, water, and all the other costs associated with your home, so other than your electricity cost possibly increasing a little, nothing else changes. Your materials cost is the most important thing you need to know. Figure out the board foot material for each project, and multiply that by your wood cost. Add a small percentage of that cost to cover finish, sandpaper, etc. For example, if your materials cost for a project is $15.00, add 5% (.75), so it now costs $15.75 in materials to produce your "widget". You may need to increase the percentage depending on the amount of finish or sand paper. You also need to add any hardware costs such as hinges, latches, etc. Doing it this way makes it simpler to adjust up or down for material price changes. Labor is easy. Just decide what you want to make per hour and add that in. This number will be your cost to produce the widget.

This is where a lot of people stop figuring and is the reason why you see Wood Whisperer cutting boards being sold on Etsy for $35.00. Labor is not profit. Labor is what you are compensating yourself to build a widget. It takes gas to go pick up lumber. It takes money to rent a booth space at shows, and I am assuming they charge for spaces at flea markets. It also takes money to buy more lumber and hardware. Once you have your cost to produce the widget, you need to add a percentage for profit so you can buy more wood, pay for gas, and pay booth fees. There can be many other costs, but you tend to control them, and I'm trying to keep this example simple. The percentage for profit can be 20%, 30%, 40%, etc. It's up to you to determine what you need to recover to replenish your supplies or buy gas.

Forgetting the profit issue, once you have the widget "cost", look at the number and ask yourself "How can I reduce this cost?". You either find a cheaper source for wood, and/or produce more widgets in a given time to lower the effective labor cost per widget. Doing this will give you more profit or allow you sell at a lower cost and appeal to a wider audience. Either way, you have to stumble around a little initially to get a feel for what makes sense and works for you.